A collection of often sceptical, always candid observations and insights on the US economy and large-cap equity markets. Readers have observed my style and perspective to be that "the emperor has no clothes," and that is reasonably accurate.
Postings reflect my philosophies and perspectives on economics, business and politics.

Sunday, November 27, 2005

US Financial Super-Utilities

Both Chase and Citibank have become massive, mediocre financial super-utilities in the past decade. But neither one has out-performed the S&P500 over the past 5 years. Chase’s last merger, with the combined Midwest banking conglomerate, FirstChicago-BancOne, hasn’t and won’t change that.

Ironically, my old boss, and SVP of Corporate Planning and Development of the “old” Chase Manhattan, Gerry Weiss, predicted back in 1986 that eventually the major money center banks of Manhattan would merge into one or two giant mediocre financial services companies. He was eerily prescient.

What Gerry saw from his unique vantage point was how difficult it was to effectively manage such a wide range of types of businesses at these banks, in conjunction with the lack of adequate managerial talent. Financial services has never attracted good managers.

Empirical research of over a decade of company performances confirmed my old friend and boss’ hunch, and added a new finding. Not only were and are these financial leviathans simply too complex for the executives that are typically drawn up through their ranks to successfully manage. By being so broadly diversified, and large, they are sure to experience every major financial calamity which befalls the sector- be it real estate lending, sub-prime credit, risky proprietary trading, or, as in the Enron case, over-zealous complex financial products marketing which apparently crossed the line from finance to abetting financial fraud. The result is that consistent total returns prove to be an elusive goal, as these huge financial behemoths are beset with every market excess which occurs in the industry.

That is no doubt why these companies are rarely, if ever selected by my portfolio strategy. Revisiting my original sector research, and Chase’s and Citigroup’s recent performances, is a comforting reminder that my strategy’s bias in favor consistently superior performance is based on sound empirical research. Size for its own sake is of no value when you want to out-perform the market, despite what analysts may believe.

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About Me

A well-educated veteran of US corporate strategy positions & hedge fund management, as well as research, product development and project work in consulting, strategy and equity management. Academic background in marketing, strategy, statistics and economics.
Currently own Performance Research Associates, LLC, through which I am involved in proprietary equity and equity options investment management.